An extremist, not a fanatic

May 09, 2007

Error by design

The Public Accounts Committee says £5.8bn was overpaid in tax credits in the first three years of their operation.This will be interpreted as evidence of the Treasury's bad administration. But this is only part of the story. Over-payments of tax credits are not due merely to incompetent management. They are an essential part of the system.Tax credits are paid on the basis of a family's past income. This means that if their income rises, the credit will be overpaid, unless the family immediately reports its change of circumstances, which it won't.In the Treasury's report that advocated the introduction of tax credits, Martin Taylor wrote (pdf):

The tax system works by looking back on the whole year and it could
only be made to respond to in-year changes by using estimates of
entitlement with adjustments after the end of the year, and support
would sometimes have to be claimed back [because it was overpaid in the first place]. (para 3.22)

And because the low-paid often have quite volatile incomes, such changes will be common. Back in 2003, the IFS's Mike Brewer estimated (pdf) that 750,000 families would be overpaid credits because their income rose.So, what's the solution to this? The Treasury's answer has been to increase the amount of the rise in incomes necessary to trigger a claimback to £25,000; this will cost taxpayers £100m this year. And it's increasd the number of staff working on tax credit compliance, to 1400.But there is anotheranswer, isn't there?